I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

Eliminating Energy Subsidies Could Reduce Emissions By 13 Percent

This is an interesting little paper arguing that one of the simple things we could do to reduce (even if not quite beat) climate change is simply to stop subsidising the use of energy. In fact, they argue that eliminating such subsidies could lead to a reduction of 13% in energy related carbon emissions:

We estimate that eliminating energy subsidies, including tax subsidies, would lead to a 13% reduction in energy-related carbon-dioxide emissions.

The InternationalEnergy Agency has made similar noises before so they’re certainly along the right lines. However, the numbers here seem to be much higher than the IEA ones. And that’s for a slightly uncomfortable reason. The definition here of subsidies is very different from the one normally used. As such it’s difficult to take these specific conclusions all that seriously.

It is absolutely true, as the IEA has repeatedly pointed out, that there are vast subsidies to the consumption of carbon based fuels. Around and about $500 billion a year. It would be of great benefit to everyone (except, of course, those getting such subsidies) if they were stopped. The point is about these subsidies though that it’s not us in the rich countries handing out the subsidies. It’s largely poorer countries and oil producing nations:

Energy subsidies are pervasive. Based on data for 176 countries, pre-tax subsidies for petroleum products, electricity, natural gas, and coal are estimated at US$480 billion in 2011, some 0.7% of global GDP. Almost half of subsidies are for petroleum products. The Middle East and north Africa region accounts for about half of pre-tax subsidies, where they are estimated at 8.6% of GDP and 21.8% of government revenues.

So, how do they get to the much higher $1.9 trillion number that they say is the true and total subsidy?

The story is different when we also take into account tax subsidies. We find that the latter subsidies are three times the size of pre-tax subsidies.

Ah, so what is a tax subsidy?

Energy is taxed below the rate of other consumption goods.

Energy taxes are not high enough to capture the negative externalities from energy consumption – including the effects on climate change, local pollution, and traffic congestion.

That’s a much stricter definition. For example, in the UK, fuel for domestic heating carries a 5% VAT rate instead of the more usual 20% one. They’re counting that 15% not charged as a subsidy. Which, arguably, it is, but then there are other goods (food, newspapers, books) which are charged a 0% rate of VAT. So we could say that there is no subsidy at all here, indeed energy is taxed more than some consumption goods.

And arguing that a Pigou Tax not charged (for that is what the second point is) is a subsidy is really becoming quite extreme. As an example, Greg Mankiw argues that the correct Pigou Tax on gas in the US is $1 a gallon. Currently the Federal Gas Tax is 50 cents (think that’s right). So, this paper is arguing that that 50 cents not charged is a subsidy.

This also brings us into the difficult question of just what the carbon tax should be in order to be the correct Pigou Tax. $5 a tonne CO2 as Nordhaus argues? $10 to $15 a I recall Richard Toll arguing? $80 from Stern, $1,000 and James Hansen does? Clearly, which one of those numbers we believe will, in this determination of the subsidy, give us very different answers as to what that subsidy is.

If we’re going to strictly, hideously, correct then we can indeed say that it is a subsidy. But there’s so much that happens in society that doesn’t pay the full and true costs that to call them all a subsidy becomes a nightmare. For example, last year a UK green group announced that carbon based fuels got a vast subsidy every year. For exactly the reason given above, those lower VAT rates. I had to point out that if this is true then green energy gets a vastly larger subsidy: I pegged it at £40 billion a year just for the UK.

For green energy is not taxed in the same way as carbon based energy: it does not pay fuel duty, the climate change levy, petroleum excise tax and so on and so on. If green energy is not taxed as much as carbon based energy then green energy must, but the definitions above, be receiving a tax subsidy compared to carbon based energy. And that’s the problem with some of these wilder calculations of subsidy.

Yes, in a strict sense, we can indeed say that the absence of a Pigou Tax which ought to be there is indeed a subsidy. But when we make that argument, and the related one of being taxed differently from other consumption goods, then we enter a nightmare of calculations about what is taxed, what isn’t and how they all should be. And leave obvious gaps for people like me to make cheap shots about the subsidies to renewables.

I do agree with the IEA numbers: that $500 billion really does need to go and the the world will be a better place when it does. The rest that this paper is talking about? Not so sure at all.

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